All items from Money Law Blog -- Bankruptcy and Tax Law in DC, MD and VA | Edward Gonzalez

Bankruptcy is designed as a way for an insolvent debtor, one who cannot pay his or her creditors, to get a fresh start. Depending on the type of bankruptcy involved--Chapter 7, Chapter 11, or Chapter 13 for example--among the main functions of a bankruptcy court are to liquidate assets, discharge certain debts, or confirm a payment plan for non-dischargeable debts.

It can also serve as a way to dispute taxes, as illustrated in a recent Virginia bankruptcy court decision . In Harris v. Commonwealth, the debtor and his wife filed for Chapter 7 bankruptcy.

In Chapter 7, also known as a liquidation bankruptcy, a trustee takes control of the "nonexempt" assets of the debtor's and reduces them to cash from which creditors will be paid. (Note that before the case is filed you and your attorney will know if there are any nonexempt assets, and can plan accordingly.) While certain unsecured debts are discharged under Chapter 7, certain types of debt, like child support and income taxes less than three years old, are not dischargeable.

I had to smile when I read the news that the banks were now lobbying to keep former Harvard bankruptcy professor and Senator-elect Elizabeth Warren from getting appointed to the Senate banking committee.

Lobbying is not cheap. It runs into the millions of dollars for a campaign. And, like most good businesspersons, I am sure the banks did some cost-benefit analysis in making this decision.

This action by the financial industry must mean they see a big threat to profits. And consequently, since bank profits and consumer losses are a zero-sum game, it also means her appointment to the committee could mean a big financial win for consumers. Granted, one person alone will not do it all, but the banks perceive she could have a significant effect on the outcome.

For consumers, let's hope the banks are not as successful with this campaign as they were in sinking her appointment to head the Consumer Financial Protection Bureau (CFPB), a sort of consumer safety protection agency she dreamt up. Among the CFPB's primary goals is to prevent the reappearance of the bad mortgages that blew up in the mid-2000s and harmed so many average people and the nation's economy as a whole. It was passed as part of the Dodd-Frank financial reform act.

We'll see.

By now, many have heard the news that well-known former baseball player Jose Canseco recently filed for bankruptcy. What many have not seen, however, is the screed he published on the website, Vice.Com, and titled: "Jose Can Say So - I'm Broke and It's the Government's Fault."

Undoubtedly he intended it as a tirade against the government. But interestingly it also serves very well as a testimonial to the dangers of tax debt I have written about in the website of our DC-based tax and bankruptcy law firm. Some excerpts from his harangue and my comments:

" . . . [I]t's my duty to warn you: It can happen to anyone.

When you owe the government--whether it be state or federal--they are relentless when it comes to getting their money back. They institute incredible penalties and interest that almost makes it seem like they want to enslave you."

The emerging trend, according to a recent CNN Money article, is that the economy has tanked to the point people can't even afford to file for bankruptcy.

Probably true, based on the experience of this law firm. When the crash hit in 2007, the biggest problem was the wave of toxic mortgages re-setting to interest rates, and consequently payments, that shot to absurd amounts. Home owners couldn't make the payments, so bankruptcy was one way to eliminate the debt and stop the foreclosure long enough to get out of the house and not have to abandon your toothbrush and Fido. This event, in turn, triggered the economic down-turn, the lay-offs and decline in income that bring us to where we are today.

The 2005 "reform" of bankruptcy law has compounded the problem for debtors by requiring more paperwork and thereby increasing costs. Among the most ludicrous requirements is pre-filing debt counseling. Bankruptcy is the last thing debtors want to do. If debt management re-payment plans were a solution, they would be doing them.